Uganda is situated in a core region primarily consisting of itself, Kenya, Tanzania, Burundi, and Rwanda. There are several common policy issues affecting this region that need to be explored. These policy issues include the appropriate trade regime, payment system, and investment flows. This section briefly assesses the possibilities for greater coordination among the core countries in the area of economic policy and, more generally, the prospects for regional integration within the context of the Cross Border Initiative (CBI), sponsored by major donors, including the IMF and the World Bank.
There has always been an interest in economic integration in eastern Africa. One early attempt was the East African Community of 1967, consisting of Uganda, Kenya, and Tanzania. Although this early attempt at regionalism was not very successful, recent interest has been spurred by the current wave of regional movements in the world and the recognition of the economic advantages that can be derived from a properly designed and effectively implemented integration policy. On August 27, 1993, representatives of Burundi, Comoros, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Tanzania, Uganda, Zambia, and Zimbabwe met in Uganda and agreed to put in place the Initiative for Promoting Cross-Border Trade, Investment, and Payments in Eastern and Southern Africa (the CBI). The agreement is intended to strengthen economic integration in the region in the framework of structural adjustment.
Although existing trading links in the eastern and southern Africa region are limited, there is a potential for regional integration to improve these trade flows, their patterns, and efficiency. Some countries, such as Burundi and Kenya, already conduct a significant part of their trade within the region (see Table 13). In 1993, Kenya exported about 18 percent of its total exports to the region, whereas the region accounted for about 11 percent of Burundi's total imports. Some 19 percent of Uganda's imports came from the region (mainly from Kenya), although Uganda's export share to the region was only about 3 percent.
Regional Trade Indicators, 1993
Regional Trade Indicators, 1993
| Percent of Imports from Eastern and Southern Africa | Percent of Exports to Eastern and Southern Africa | |
|---|---|---|
| Burundi | 10.5 | 10.5 |
| Kenya | 2.3 | 18.0 |
| Tanzania | 5.3 | 10.8 |
| Uganda | 18.9 | 3.0 |
Regional Trade Indicators, 1993
| Percent of Imports from Eastern and Southern Africa | Percent of Exports to Eastern and Southern Africa | |
|---|---|---|
| Burundi | 10.5 | 10.5 |
| Kenya | 2.3 | 18.0 |
| Tanzania | 5.3 | 10.8 |
| Uganda | 18.9 | 3.0 |
Regional integration is expected to lead to several dynamic welfare benefits for the members of the core community, including terms of trade effects, economies of large-scale production, and procompetitive effects. Because of its initially lower tariffs, Uganda will most likely reap terms of trade gains in relation to its trading partners as internal trade is liberalized. Burundi, for example, currently has a maximum rate of import duty of 100 percent, Kenya 45 percent, and Tanzania 40 percent, while Uganda's is only 30 percent. The tariff goals of the CBI are to remove all tariff barriers on intraregional trade by the end of 1996 and to move toward a common external tariff at the level of the country with the lowest tariffs by the end of 1998.
Given the similarity of the economic structures of the core countries, the impact of the CBI trade liberalization will be felt mostly in the primary sector. With the agricultural sector predominant in the region (possibly with the exception of Kenya, where services make up 52 percent of GDP), the CBI will stimulate trade flows in this area and will mostly affect noncash crops and livestock. Although agricultural exports now account for a small percentage of exports in Uganda, the prospects for expansion within a CBI free trade area are significant. Unlike manufactured products, agricultural exports may not require major technical change and investment in order to expand. The domestic terms of trade for food crop production in Uganda may have declined because of the improvement in supply. Uganda is a very fertile country with only a small proportion of total land area under cultivation. If Ugandan agricultural exports can command a higher export price than the domestic price, there will be a powerful incentive to increase exports to the CBI region. Thus, the competition and specialization that the CBI will encourage are likely to benefit Uganda, leading to scale economies and efficiency.
A major objective of the CBI is to liberalize the payments system in the region. Uganda has already taken the necessary steps to make the shilling a convertible currency. The CBI will take further action to remove restrictions on certain types of capital transactions, the goal being to reach current account convertibility after the CBI has become fully operational. Uganda can only benefit from this development, given its already liberalized environment and favorable policies toward domestic and foreign investment.
In Uganda, the growth-enhancing effect of integration will have a positive impact on government revenue and on the overall fiscal situation in the long term. Growth and higher incomes will come from the improved terms of trade, higher agricultural exports, increased investment flows, and improvements in efficiency and intersectoral specialization in the participating countries. Nevertheless, the short-term impact of integration could lower government revenues. This is likely to result from the reduction of external tariffs and, to a lesser extent, the possible appreciation of the exchange rate. The movement of the exchange rate is of course uncertain and depends on the conduct of monetary and fiscal policies, the effect of the established union on the balance of trade, and the levels of direct investment and capital flows. On the other hand, customs duties are a major contributor to tax revenues in Uganda, accounting for more than 40 percent of the total. Appropriate macroeconomic measures—such as the reform of domestic indirect taxes—may be required to offset the negative budgetary impact of tariff reform under an integration agreement. Regional integration naturally places a constraint on tax reform measures since it requires the harmonization of the domestic indirect tax systems between member countries. Whereas Kenya has already introduced the value-added tax as the sales tax instrument, Burundi, Tanzania, and Uganda have not. Uganda is planning to introduce a VAT in the next fiscal year (1995/96), and the rate structure should be determined after taking into account the need to increase fiscal revenue and offset revenue losses from the tariff reform.